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Amazon scoffs at Lehman
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February 6, 2001: 1:40 p.m. ET
Web retailer calls credit report 'silly' and 'chock full of errors'
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NEW YORK (CNNfn) - Amazon.com rebutted a report issued by a Lehman credit analyst Tuesday which warned that the online retailer will face a "creditor squeeze" in the second half of this year because the company's liabilities are growing much faster than its assets.
In the report, Lehman analyst Ravi Suria urged investors to avoid Amazon's convertible bonds, which are exchangeable for a set number of shares of common stock at a pre-stated price.
He made the same recommendation last summer, when he issued a similarly harsh report on the state of Amazon's credit quality.
"When we wrote our initial report recommending that investors avoid Amazon's convertibles last June, our primary concern was that the company would have liquidity problems in the first half of 2001," Suria wrote in Tuesday's 36-page report.
"The reported numbers in the past few quarters have only increased our concerns about tightening liquidity," Suria added. 
Suria said it is now most appropriate to analyze Amazon by the "going concern" standard that auditors use to assess a company when there is "substantial doubt" about its ability to keep running.
By year's end, Suria projects that Amazon will have negative $38 million of "liquidity," or working capital, which is the amount by which a company's liabilities exceed its assets.
Bill Curry, an Amazon spokesman, dismissed the report out of hand, calling it "silly" and "chock full of errors." He also cast doubt on Suria's credibility by pointing out that the analyst had warned in his report last June that Amazon was in danger of running out of cash by the end of 2000.
When Amazon reported its latest quarterly results late last month, the company reported that it had finished the year with $1.1 billion in cash and marketable securities and stressed that Amazon is in no danger of running out of cash.
"He said we would be out of cash by the end of 2000, and he missed by $1.1 billion," Curry said. "It's a silly report that's chock full of errors."
In an interview on CNNfn's In the Money, Curry even suggested that some of Suria's mathematical calculations were erroneous. (162K WAV) or (162K AIFF)
He reiterated the company's earlier statements that Amazon does not plan to return to the debt markets for capital this year and that the company will finish 2001 with $900 million in cash and marketable securities.
"It's cash that pays the piper, not accounting, and we have plenty of cash to see us through," he said. He also stressed that Amazon is expecting, for the first time since its inception, to turn an operating profit by the fourth quarter of this year.
But in his final analysis, Suria concluded that the company's cash position is likely to continue to fall significantly in the current quarter, despite improvements in its gross-profit and operating margins, because of payments it needs to make to creditors for merchandise purchased and sold in the fourth quarter of 2000.
More importantly, Suria concluded, Amazon's working capital will continue to decline every quarter in the foreseeable future until the company starts generating enough of a cash profit to cover interest payments or it receives an infusion of capital.
"With the significant decrease in working capital and assuming the availability of no financing, vendors and suppliers will require Amazon to speed up payments and therefore incur quicker and higher cashflows than in the past," Suria said in his report.
"Consequently, various payable accounts, including accounts payable and accrued expenses, will fall as a percentage of sales compared to the past, and cash and cash equivalents (not including marketable securities) will come into severe pressure in [the second half of 2001.]"
Amazon's 4.75 percent convertible bonds maturing in 2009 were quoted at 44.5 cents on the dollar in afternoon trade Tuesday with a yield to maturity of 18.2 percent. They are convertible to Amazon stock at $78.03.
In Nasdaq trading, Amazon (AMZN: Research, Estimates) shares were up 50 cents at $14.94, a 3.5 percent gain on the day.
-- Reuters contributed to this report 
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